Fairfax is making a fortune betting on Europe’s biggest losers

Fairfax Financial Prem Watsa is making fortune on Europe's big losers

Fairfax Financial Holdings Ltd., which has seen its 2011 investment in Ireland’s biggest bank jump about 50%, is now focusing on Greece, betting that the worst has passed for the recession-battered nation.

“In terms of the economy, the last four or five years have been very tough for Greece,” Fairfax Chairman and Chief Executive Officer Prem Watsa said in a June 19 telephone interview. “The economy has come down very significantly, unemployment is high. But on the other hand, we think that perhaps a bottom has been reached.”

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Fairfax said on Wednesday that it will invest about 164 million euros ($217 million) in Eurobank Properties Real Estate Investment Co. as part of a share capital increase, bringing the Toronto-based firm’s stake in the Greek property company to 42% from 19%.

Watsa said Eurobank Properties is raising money at the right time to take advantage of a “lot of opportunities in Greece.” The country’s state-asset sales program, which includes a large real estate portfolio, has the potential to generate “significant growth” from private investors.

“We think that the prospects in Greece for Eurobank Properties will be very significant in the next five years, perhaps the next 10 years,” he said, without giving any forecasts.

Eurobank Rally

Shares in Eurobank Properties have more than doubled since falling to a low in June 2012, when the Athens Stock Exchange General Index tumbled as inconclusive elections stoked fears about a possible euro exit for the Mediterranean country. The ASE has since gained 46%.

Greece is now in its sixth year of recession, with unemployment at 27% as it fired state workers, cut pensions and wages, and raised taxes. The economy has shrunk by about a fifth since 2008. The European Commission forecast gross domestic product will contract 4.2% this year.

Prime Minister Antonis Samaras has vowed to meet budget-cut targets, implement structural reforms and speed up state-asset sales to satisfy the conditions of a 240 billion euro loan agreement with the euro area and International Monetary Fund.

Greek stocks tumbled 6.1% at the close of trading in Athens as the Democratic Left party Friday withdrew support for Samaras’s coalition government amid disagreement over the premier’s decision to close Greece’s public broadcaster. Eurobank Properties still rose 9.8% to 7.32 euros, its third day of gains and highest price since March 2010.

The yield on Greece’s 10-year bond rose 62 basis points to 11.28% today, compared with 27.21% on June 25, 2012.

‘Long Road’

“Greece as a country is on a long road of stability and growth from the very difficult times that it’s gone through,” Watsa said.“ We think the Greek people have really had tremendous hardship in the last few years but we do believe it’s now perhaps at the end of the tunnel and that its worst days are behind it.”

Fairfax Financial also holds a 7.7% stake in Sarantis SA, a distributor of cosmetics and household goods and a 5.4% stake in Jumbo SA, Greece’s biggest toy and baby products retailer, according to data compiled by Bloomberg.

In July 2011, Fairfax Financial, WL Ross & Co., and Fidelity Investments were among five institutions buying a combined 34.9% stake in Bank of Ireland from the government. Fairfax Financial holds a 9.9% stake in the country’s largest bank, according to data compiled by Bloomberg. The shares have risen about 50% since the deal was announced.

Bailout Exit

Irish Prime Minister Enda Kenny is aiming to exit the country’s three-year international bailout on time at the end of the year, with the Finance Ministry forecasting economic growth of 1.3% this year and 2.4% in 2014.

“When we made our investment, the 10-year Irish bond rates were running at 13, 14%,” Watsa said. “Eighteen months later they dropped to 4%. A huge amount of foreign investment now has come back into Ireland. It wasn’t at the time. So we see the same type of activity happening in Greece.”

Watsa, who was born in Hyderabad, India, in 1950, founded Fairfax Financial in 1985, modelling his management style after Warren Buffett, who buys the assets of out-of-favor securities. Fairfax Financial almost doubled its stake in Research In Motion Ltd. last July to 9.9%, making it the biggest investor in the company now known as Blackberry.

Annual Growth

In the 27 years the financial services holding company has been operating, it has generated compound annual growth in book value per share of 23%, according to a 2012 financial report on its website. In 2012, book value per share grew by 6.5% “because of our very cautious view of financial markets,” the company said. Common shareholders’ equity stood at $7.7 billion at end of 2012.

When asked about threats of political instability in Greece and the possibility of euro exit fears rekindling, Watsa cited his experience in Ireland.

“We always look at the possibilities,” he said. “When we invested in Ireland many people asked us why we put money into Ireland at the time. We try to understand the facts, we try to understand the company, we understand the people and we make our own decisions so we’ve done that in this case and I must say over the long term, we’re very excited about the prospects for Greece.”

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